What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2022-07-27 compared with 2022-04-28 · 180 added, 98 removed, 513 unchanged (35% of the section changed)

3 unchanged sentences

(in thousands)

March 31, 2022 December 31, 2021

June 30, 2022 December 31, 2021

Current assets:

28 unchanged sentences

81,940 and 81,712 shares issued and outstanding at

March 31, 2022 and December 31, 2021, respectively

June 30, 2022 and December 31, 2021, respectively

Additional paid-in capital 170,251 145,810

Retained earnings 273,615 276,449

(Accumulated deficit) retained earnings

( 15,140 ) 276,449

Accumulated other comprehensive (loss) ( 22,151 ) ( 6,988 )

6 unchanged sentences

Three Months Ended

June 30, Six Months Ended

2022 2021 2022 2021

Subscription services $ 171,832 $ 152,075 $ 341,865 $ 295,494

15 unchanged sentences

Total operating expenses 264,262 239,979 533,752 469,430

Income from operations 18,620 1,601

(Loss) income from operations ( 85,040 ) 1,192 ( 66,420 ) 2,793

Foreign currency transaction gain (loss) 1,713 ( 403 ) 4,589 ( 5,501 )

1 unchanged sentence

Interest expense ( 1,944 ) ( 1,959 ) ( 3,890 ) ( 3,839 )

(Loss) on capped call transactions ( 30,560 ) ( 19,117 )

(Loss) income on capped call transactions ( 18,945 ) 26,309 ( 49,505 ) 7,192

Other income, net 3,785 — 6,526 106

(Loss) before (benefit from) income taxes ( 8,062 ) ( 24,235 )

(Benefit from) income taxes ( 7,683 ) ( 17,618 )

Net (loss) $ ( 379 ) $ ( 6,617 )

(Loss) per share

(Loss) income before provision for (benefit from) income taxes ( 100,122 ) 25,375 ( 108,184 ) 1,140

Provision for (benefit from) income taxes 186,174 ( 11,916 ) 178,491 ( 29,534 )

Net (loss) income $ ( 286,296 ) $ 37,291 $ ( 286,675 ) $ 30,674

(Loss) earnings per share

Basic $ ( 3.50 ) $ 0.46 $ ( 3.51 ) $ 0.38

5 unchanged sentences

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(in thousands)

Three Months Ended

Net (loss) $ ( 379 ) $ ( 6,617 )

June 30, Six Months Ended

2022 2021 2022 2021

Net (loss) income $ ( 286,296 ) $ 37,291 $ ( 286,675 ) $ 30,674

Other comprehensive (loss) income, net of tax

Unrealized gain on available-for-sale securities 222 1,010

Unrealized (loss) gain on available-for-sale securities ( 1,149 ) 121 ( 927 ) 1,131

Foreign currency translation adjustments ( 11,466 ) 1,461 ( 14,236 ) 731

Total other comprehensive (loss) income, net of tax $ ( 12,615 ) $ 1,582 $ ( 15,163 ) $ 1,862

Comprehensive (loss) $ ( 2,927 ) $ ( 6,337 )

Comprehensive (loss) income $ ( 298,911 ) $ 38,873 $ ( 301,838 ) $ 32,536

See notes to unaudited condensed consolidated financial statements.

2 unchanged sentences

(in thousands, except per share amounts)

Paid-In Capital Retained Earnings Accumulated Other Comprehensive (Loss)

Paid-In Capital Retained Earnings (Accumulated Deficit) Accumulated Other Comprehensive (Loss)

Stockholders’ Equity

12 unchanged sentences

March 31, 2021 81,246 $ 812 $ 140,558 $ 340,223 $ ( 2,668 ) $ 478,925

Repurchase of common stock ( 81 ) ( 1 ) ( 10,245 ) — — ( 10,246 )

Issuance of common stock for stock compensation plans 267 3 ( 16,199 ) — — ( 16,196 )

Issuance of common stock under the employee stock purchase plan 24 1 2,858 — — 2,859

Stock-based compensation — — 30,698 — — 30,698

Cash dividends declared ($ 0.03 per share)

— — — ( 2,445 ) — ( 2,445 )

Other comprehensive income — — — — 1,582 1,582

Net income — — — 37,291 — 37,291

June 30, 2021 81,456 $ 815 $ 147,670 $ 375,069 $ ( 1,086 ) $ 522,468

December 31, 2021 81,712 $ 817 $ 145,810 $ 276,449 $ ( 6,988 ) $ 416,088

8 unchanged sentences

March 31, 2022 81,802 $ 818 $ 141,771 $ 273,615 $ ( 9,536 ) $ 406,668

Repurchase of common stock ( 38 ) — ( 1,925 ) — — ( 1,925 )

Issuance of common stock for stock compensation plans 117 1 ( 3,252 ) — — ( 3,251 )

Issuance of common stock under the employee stock purchase plan 59 — 2,357 — — 2,357

Stock-based compensation — — 31,300 — — 31,300

Cash dividends declared ($ 0.03 per share)

— — — ( 2,459 ) — ( 2,459 )

Other comprehensive (loss) — — — — ( 12,615 ) ( 12,615 )

Net (loss) — — — ( 286,296 ) — ( 286,296 )

June 30, 2022 81,940 $ 819 $ 170,251 $ ( 15,140 ) $ ( 22,151 ) $ 133,779

See notes to unaudited condensed consolidated financial statements.

2 unchanged sentences

(in thousands)

Three Months Ended

Six Months Ended

Operating activities

Net (loss) $ ( 379 ) $ ( 6,617 )

Adjustments to reconcile net (loss) to cash provided by operating activities

Net (loss) income $ ( 286,675 ) $ 30,674

Adjustments to reconcile net (loss) income to cash (used in) provided by operating activities

Stock-based compensation 59,527 60,788

Deferred income taxes 169,105 ( 28,232 )

Loss on capped call transactions 30,560 19,117

Loss (gain) on capped call transactions 49,505 ( 7,192 )

Amortization of deferred commissions 28,155 21,202

4 unchanged sentences

Change in operating assets and liabilities, net ( 32,625 ) ( 88,170 )

Cash provided by operating activities 15,116 21,650

Cash (used in) provided by operating activities ( 5,069 ) 19,410

Investing activities

11 unchanged sentences

Effect of exchange rate changes on cash and cash equivalents ( 2,907 ) ( 1,207 )

Net (decrease) increase in cash and cash equivalents ( 27,194 ) 809

Net (decrease) in cash and cash equivalents ( 50,690 ) ( 32,021 )

Cash and cash equivalents, beginning of period 159,965 171,899

11 unchanged sentences

The operating results for the interim periods presented do not necessarily indicate the expected results for the full year 2022.

Certain prior period amounts reported in our condensed consolidated financial statements and notes thereto have been reclassified to conform to the current year presentation.

Certain prior period amounts reported in our condensed consolidated financial statements and notes thereto have been reclassified to conform to the current year’s presentation.

Such reclassifications did not affect total revenues, operating income, or net income.

MARKETABLE SECURITIES

March 31, 2022 December 31, 2021

June 30, 2022 December 31, 2021

(in thousands) Amortized Cost Unrealized Gains Unrealized Losses Fair Value Amortized Cost Unrealized Gains Unrealized Losses Fair Value

2 unchanged sentences

$ 191,339 $ — $ ( 3,726 ) $ 187,613 $ 203,659 $ 2 $ ( 847 ) $ 202,814

As of March 31, 2022, marketable securities’ maturities ranged from April 2022 to September 2024, with a weighted-average remaining maturity of 1.02 years.

As of June 30, 2022, marketable securities’ maturities ranged from July 2022 to November 2024, with a weighted-average remaining maturity of 0.9 years.

RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE

(in thousands)

March 31, 2022 December 31, 2021

June 30, 2022 December 31, 2021

Accounts receivable $ 171,556 $ 182,717

6 unchanged sentences

(Dollars in thousands)

March 31, 2022

June 30, 2022

1 year or less $ 201,130 63 %

4 unchanged sentences

(Dollars in thousands)

March 31, 2022

June 30, 2022

2022 $ 81,887 26 %

8 unchanged sentences

Clients accounting for 10% or more of the Company’s total receivables:

March 31, 2022 December 31, 2021

June 30, 2022 December 31, 2021

Accounts receivable * 1 %

1 unchanged sentence

Total receivables * 10 %

* Client accounted for less than 10% of receivables

Contract assets

1 unchanged sentence

(in thousands)

March 31, 2022 December 31, 2021

June 30, 2022 December 31, 2021

Contract assets (1)

8 unchanged sentences

(in thousands)

March 31, 2022 December 31, 2021

June 30, 2022 December 31, 2021

Deferred revenue $ 269,121 $ 275,844

2 unchanged sentences

(1) Included in other long-term liabilities.

The change in deferred revenue in the three months ended March 31, 2022 was primarily due to new billings in advance of revenue recognition and $ 124.9 million of revenue recognized during the period that was included in deferred revenue as of December 31, 2021.

The change in deferred revenue in the six months ended June 30, 2022 was primarily due to new billings in advance of revenue recognition offset by $ 205.0 million of revenue recognized during the period that was included in deferred revenue as of December 31, 2021.

DEFERRED COMMISSIONS

(in thousands)

March 31, 2022 December 31, 2021

June 30, 2022 December 31, 2021

Deferred commissions (1)

2 unchanged sentences

Three Months Ended

June 30, Six Months Ended

(in thousands) 2022 2021 2022 2021

6 unchanged sentences

Change in goodwill:

Three Months Ended

Six Months Ended

(in thousands)

2 unchanged sentences

Currency translation adjustments ( 206 ) 241

March 31, $ 82,031

June 30, $ 81,717 $ 82,173

Intangible assets are recorded at cost and amortized using the straight-line method over their estimated useful lives.

March 31, 2022

June 30, 2022

(in thousands) Useful Lives Cost Accumulated Amortization Net Book Value (1)

17 unchanged sentences

Three Months Ended

June 30, Six Months Ended

(in thousands) 2022 2021 2022 2021

Cost of revenue

$ 683 $ 629 $ 1,312 $ 1,258

Selling and marketing

342 373 685 746

$ 1,025 $ 1,002 $ 1,997 $ 2,004

Future estimated intangibles assets amortization:

(in thousands)

March 31, 2022

June 30, 2022

Remainder of 2022 $ 2,098

1 unchanged sentence

Other current assets

(in thousands) March 31, 2022 December 31, 2021

(in thousands) June 30, 2022 December 31, 2021

Income tax receivables $ 22,982 $ 25,691

5 unchanged sentences

Other long-term assets

(in thousands) March 31, 2022 December 31, 2021

(in thousands) June 30, 2022 December 31, 2021

Deferred income taxes $ 6,092 $ 180,656

3 unchanged sentences

Property and equipment 34,886 26,837

Venture investments 16,073 7,648

Intangible assets 12,991 14,063

3 unchanged sentences

Other current liabilities

(in thousands) March 31, 2022 December 31, 2021

(in thousands) June 30, 2022 December 31, 2021

Operating lease liabilities $ 5,341 $ 6,989

2 unchanged sentences

Other long-term liabilities

(in thousands) March 31, 2022 December 31, 2021

(in thousands) June 30, 2022 December 31, 2021

Deferred revenue $ 5,417 $ 5,655

15 unchanged sentences

Three Months Ended

June 30, Six Months Ended

(in thousands) 2022 2021 2022 2021

4 unchanged sentences

$ 6,479 $ ( 2,117 ) $ 13,144 $ 29

(1) The lower fixed lease costs in the three months ended March 31, 2021 was due to the modification of the corporate headquarters lease.

(1) The lower fixed lease costs in the six months ended June 30, 2021 was due to the modification of the corporate headquarters lease.

PEGASYSTEMS INC.

1 unchanged sentence

Right of use assets and lease liabilities

(in thousands) March 31, 2022 December 31, 2021

(in thousands) June 30, 2022 December 31, 2021

Right of use assets (1)

7 unchanged sentences

Weighted-average remaining lease term and discount rate for the Company’s leases were:

March 31, 2022 December 31, 2021

June 30, 2022 December 31, 2021

Weighted-average remaining lease term 7.5 years 7.7 years

4 unchanged sentences

Maturities of lease liabilities:

(in thousands) March 31, 2022

(in thousands) June 30, 2022

Remainder of 2022 $ ( 401 )

4 unchanged sentences

Cash flow information

Three Months Ended

Six Months Ended

(in thousands) 2022 2021

12 unchanged sentences

Before September 1, 2024, noteholders may convert their Notes in the following circumstances:

• During any calendar quarter beginning after June 30, 2020 (and only during such calendar quarter), if the last reported sale price per share of the Company’s common stock exceeds 130 % of the conversion price for each of at least 20 trading days (whether or not consecutive) during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

• During the five consecutive business days immediately after any five consecutive trading day period (the “Measurement Period”), if the trading price per $1,000 principal amount of Notes for each trading day of the Measurement Period was less than 98 % of the product of the last reported sale price per share of common stock on such trading day and the conversion rate on such trading day.

• Upon certain corporate events or distributions or if the Company calls any Notes for redemption, noteholders may convert before the close of business on the business day immediately before the related redemption date (or, if the Company fails to pay the redemption price in full on the redemption date, until the Company pays the redemption price).

As of March 31, 2022, the Notes were not eligible for conversion.

As of June 30, 2022, the Notes were not eligible for conversion.

Repurchase rights

3 unchanged sentences

Carrying value of the Notes:

(in thousands) March 31, 2022 December 31, 2021

(in thousands) June 30, 2022 December 31, 2021

Principal $ 600,000 $ 600,000

3 unchanged sentences

Three Months Ended

June 30, Six Months Ended

(in thousands) 2022 2021 2022 2021

3 unchanged sentences

720 675 1,439 1,348

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

$ 1,845 $ 1,800 $ 3,689 $ 3,598

The effective interest rate for the Notes:

Three Months Ended

Six Months Ended

Weighted-average effective interest rate 1.2 % 1.2 %

Future payments of principal and contractual interest:

March 31, 2022

June 30, 2022

(in thousands) Principal Interest Total

9 unchanged sentences

The cap price of the Capped Call Transactions is subject to adjustment upon specified extraordinary events affecting the Company, including mergers and tender offers.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The Capped Call Transactions are accounted for as derivative instruments and do not qualify for the Company’s own equity scope exception in ASC 815 since, in some cases of early settlement, the settlement value of the Capped Call Transactions, calculated following the governing documents, may not represent a fair value measurement.

1 unchanged sentence

Change in capped call transactions:

Three Months Ended

Six Months Ended

(in thousands) 2022 2021

1 unchanged sentence

Fair value adjustment ( 49,505 ) 7,192

March 31, $ 29,404 $ 64,480

June 30, $ 10,459 $ 90,789

Credit facility

8 unchanged sentences

• Beginning with the quarter ended March 31, 2023, a maximum net consolidated leverage ratio of 3.5 to 1.0 (with a step-up for certain acquisitions) and a minimum consolidated interest coverage ratio of 3.5 to 1.0.

As of March 31, 2022 and December 31, 2021, the Company had no outstanding borrowings under the Credit Facility.

As of June 30, 2022 and December 31, 2021, the Company had no outstanding borrowings under the Credit Facility.

FAIR VALUE MEASUREMENTS

2 unchanged sentences

Fair value is an exit price, representing the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants based on assumptions that market participants would use in pricing an asset or liability.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

As a basis for classifying the fair value measurements, a three-tier fair value hierarchy, which classifies the fair value measurements based on the inputs used in measuring fair value, was established as follows:

4 unchanged sentences

The fair value of the Capped Call Transactions at the end of each reporting period is determined using a Black-Scholes option-pricing model.

The valuation model use various market-based inputs, including stock price, remaining contractual term, expected volatility, risk-free interest rate, and expected dividend yield.

The valuation model uses various market-based inputs, including stock price, remaining contractual term, expected volatility, risk-free interest rate, and expected dividend yield.

The Company applies judgment when determining expected volatility.

2 unchanged sentences

Assets and liabilities measured at fair value on a recurring basis:

March 31, 2022 December 31, 2021

June 30, 2022 December 31, 2021

(in thousands) Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total

7 unchanged sentences

(2) Investments in privately-held companies.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Changes in venture investments:

Three Months Ended

Six Months Ended

(in thousands) 2022 2021

6 unchanged sentences

included in other comprehensive income 2,502 1,220

March 31, $ 12,830 $ 9,756

June 30, $ 16,073 $ 9,779

The carrying value of certain other financial instruments, including receivables and accounts payable, approximates fair value due to these items’ short maturity.

Fair value of the Notes

The Notes’ fair value (including the conversion feature embedded in the Notes) was $ 573.0 million as of March 31, 2022 and $ 642.0 million as of December 31, 2021.

The Notes’ fair value (including the conversion feature embedded in the Notes) was $ 482.5 million as of June 30, 2022 and $ 642.0 million as of December 31, 2021.

The fair value was determined based on the Notes’ quoted price in an over-the-counter market on the last trading day of the reporting period and classified within Level 2 in the fair value hierarchy.

1 unchanged sentence

Three Months Ended

June 30, Six Months Ended

(Dollars in thousands)

2022 2021 2022 2021

$ 147,725 54 % $ 189,297 58 % $ 364,997 55 % $ 383,865 60 %

Other Americas 16,261 6 % 14,058 4 % 62,012 10 % 25,959 4 %

3 unchanged sentences

$ 274,337 100 % $ 325,702 100 % $ 650,644 100 % $ 639,201 100 %

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Revenue streams

Three Months Ended

June 30, Six Months Ended

(in thousands)

2022 2021 2022 2021

Perpetual license 2,266 12,596 $ 9,706 $ 18,048

7 unchanged sentences

Three Months Ended

June 30, Six Months Ended

(in thousands) 2022 2021 2022 2021

7 unchanged sentences

274,337 325,702 $ 650,644 $ 639,201

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Remaining performance obligations ("Backlog")

Expected future revenue from existing non-cancellable contracts:

As of March 31, 2022:

(Dollars in thousands) Subscription services Subscription

license Perpetual

license Consulting Total

As of June 30, 2022:

(Dollars in thousands) Subscription services Subscription license Perpetual license Consulting Total

Maintenance Pega Cloud

6 unchanged sentences

$ 309,686 $ 698,167 $ 61,327 $ 13,438 $ 43,076 $ 1,125,694 100 %

As of March 31, 2021:

(Dollars in thousands) Subscription services Subscription

license Perpetual

license Consulting Total

As of June 30, 2021:

(Dollars in thousands) Subscription services Subscription license Perpetual license Consulting Total

Maintenance Pega Cloud

6 unchanged sentences

$ 336,449 $ 602,735 $ 63,018 $ 6,941 $ 21,993 $ 1,031,136 100 %

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Major clients

Clients accounting for 10% or more of the Company’s total revenue:

Three Months Ended

June 30, Six Months Ended

(Dollars in thousands) 2022 2021 2022 2021

Total revenue $ 274,337 $ 325,702 $ 650,644 $ 639,201

Client A * 13 % * *

STOCK-BASED COMPENSATION

Three Months Ended

June 30, Six Months Ended

(in thousands) 2022 2021 2022 2021

4 unchanged sentences

Research and development

7,355 6,343 14,701 13,113

General and administrative

4,733 3,748 8,278 7,433

$ 31,300 $ 30,688 $ 59,527 $ 60,788

Income tax benefit

$ ( 543 ) $ ( 6,192 ) $ ( 905 ) $ ( 12,183 )

As of March 31, 2022, the Company had $ 200.8 million of unrecognized stock-based compensation expense, net of estimated forfeitures, which is expected to be recognized over a weighted-average period of 2.3 years.

Three Months Ended

March 31, 2022

As of June 30, 2022, the Company had $ 195.7 million of unrecognized stock-based compensation expense, net of estimated forfeitures, which is expected to be recognized over a weighted-average period of 2.1 years.

Six Months Ended

June 30, 2022

(in thousands) Shares Total Fair Value

3 unchanged sentences

4,351 $ 99,506

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Effective income tax rate

Three Months Ended

June 30, Six Months Ended

(Dollars in thousands) 2022 2021 2022 2021

(Benefit from) income taxes $ ( 7,683 ) $ ( 17,618 )

Effective income tax benefit rate 95 % 73 %

The change in the effective income tax benefit rate was primarily due to the impact of discrete tax items which were proportionately larger on a lower loss before income taxes.

Stock-based compensation increases the variability of our effective tax rates.

The impact of stock-based compensation on a given period depends on our profitability, the attributes of the stock compensation awards the Company grants, and award holders' exercise behavior.

(LOSS) PER SHARE

Basic (loss) per share is calculated using the weighted-average number of common shares outstanding during the period.

Diluted (loss) per share is calculated using the weighted-average number of common shares outstanding during the period, plus the dilutive effect of outstanding stock options, RSUs, and convertible senior notes.

Calculation of (loss) per share:

Provision for (benefit from) income taxes $ 186,174 $ ( 11,916 ) $ 178,491 $ ( 29,534 )

Effective income tax rate (benefit rate) 165 % ( 2,591 ) %

The change in the effective income tax rate (benefit rate) in the six months ended June 30, 2022 was primarily due to the recognition of a $ 191.9 million valuation allowance on the Company’s deferred tax assets.

The Company recognizes deferred tax assets to the extent that it believes that these assets are more likely than not to be realized.

Future realization of deferred tax assets ultimately depends on sufficient taxable income within the available carryback or carryforward periods.

The Company’s deferred tax valuation allowance requires significant judgment and uncertainties, including assumptions about future taxable income based on historical and projected information.

On a quarterly basis, the Company reassess the need for a valuation allowance on its existing net deferred tax assets by tax-paying jurisdiction, weighing positive and negative evidence to assess its recoverability.

In making such a determination, the Company considers all available and objectively verifiable negative and positive evidence, including future reversals of existing taxable temporary differences, committed contractual backlog (“Backlog”), projected future taxable income inclusive of the impact of enacted legislation, tax-planning strategies, and results of recent operations.

The weight given to the potential effect of negative and positive evidence is commensurate with the extent to which it can be objectively verified.

As of June 30, 2022, the Company’s Backlog balance was not sufficient to recover our net deferred tax assets.

The Backlog balance and other unsettled circumstances, impacting the Company’s operations, reduced the Backlog’s weight as objectively verifiable positive evidence to generate sufficient taxable income to recover its net deferred tax assets.

These unsettled circumstances include growing and extended geopolitical turmoil, increasing inflation, and an uncertain global economic outlook.

As of June 30, 2022 the combination of the above factors caused the Company to conclude there is no longer sufficient objectively verifiable positive evidence to support that it is more likely than not the Company will generate sufficient future taxable income to recover the Company’s net deferred tax assets.

Accordingly, the Company recorded a valuation allowance of $ 191.9 million in income tax expense during the three months ended June 30, 2022.

(LOSS) EARNINGS PER SHARE

Basic (loss) earnings per share is calculated using the weighted-average number of common shares outstanding during the period.

Diluted (loss) earnings per share is calculated using the weighted-average number of common shares outstanding during the period, plus the dilutive effect of outstanding stock options, RSUs, and convertible senior notes.

Calculation of (loss) earnings per share:

Three Months Ended

June 30, Six Months Ended

(in thousands, except per share amounts) 2022 2021 2022 2021

Net (loss) $ ( 379 ) $ ( 6,617 )

Net (loss) income $ ( 286,296 ) $ 37,291 $ ( 286,675 ) $ 30,674

Weighted-average common shares outstanding 81,847 81,316 81,764 81,161

(Loss) per share, basic $ 0.00 $ ( 0.08 )

Net (loss) $ ( 379 ) $ ( 6,617 )

(Loss) earnings per share, basic $ ( 3.50 ) $ 0.46 $ ( 3.51 ) $ 0.38

Net (loss) income $ ( 286,296 ) $ 37,291 $ ( 286,675 ) $ 30,674

Interest expense associated with convertible debt instruments, net of tax — 1,351 — —

Numerator for diluted EPS $ ( 286,296 ) $ 38,642 $ ( 286,675 ) $ 30,674

Weighted-average effect of dilutive securities:

Convertible debt — 4,443 — —

Stock options — 3,266 — 3,416

RSUs — 1,295 — 1,429

Effect of dilutive securities — 9,004 — 4,845

Weighted-average common shares outstanding, assuming dilution (1) (2) (3)

81,847 90,320 81,764 86,006

(Loss) per share, diluted $ 0.00 $ ( 0.08 )

(Loss) earnings per share, diluted $ ( 3.50 ) $ 0.43 $ ( 3.51 ) $ 0.36

Outstanding anti-dilutive stock options and RSUs (4)

3,569 19 3,873 22

(1) In periods of loss, all dilutive securities are excluded as their inclusion would be anti-dilutive.

6 unchanged sentences

The Capped Call Transactions are excluded from weighted-average common shares outstanding, assuming dilution, in all periods as their effect would be anti-dilutive.

(4) Outstanding stock options and RSUs that were anti-dilutive under the treasury stock method in the period were excluded from the computation of diluted (loss) per share.

(4) Outstanding stock options and RSUs that were anti-dilutive under the treasury stock method in the period were excluded from the computation of diluted (loss) earnings per share.

These awards may be dilutive in the future.

5 unchanged sentences

In addition, as the Company is a party to ongoing litigation, it is at least reasonably possible that our estimates will change in the near term and the effect may be material.

As of March 31, 2022 and December 31, 2021, the Company has no accrued losses for litigation.

As of June 30, 2022 and December 31, 2021, the Company has no accrued losses for litigation.

Pegasystems Inc.

7 unchanged sentences

On April 15, 2022, each of the parties filed motions for summary judgment with the court .

These motions were heard on July 15, 2022 and no decision has been rendered as of the date of this filing .

The Company continues to believe the counterclaims brought by Appian against the Company are without merit, and the Company intends to vigorously pursue its claims against Appian and defend against the counterclaims brought against the Company in this matter.

2 unchanged sentences

& Youyong Zou

As previously reported, the Company is a defendant in litigation brought by Appian that is currently being tried in Virginia (the “Court”) titled Appian Corp.

As previously reported, the Company is a defendant in litigation brought by Appian in the Circuit Court of Fairfax County, Virginia (the “Court”) titled Appian Corp.

Pegasystems Inc.

1 unchanged sentence

2020-07216 (Fairfax Cty.

The jury trial began on March 21, 2022.

On April 13, 2022, Appian withdrew its claim against the Company for tortious interference with business expectancy.

On that same day, in the course of making determinations on various motions, the Court stated that if the jury finds that the Company misappropriated information that constituted Appian trade secrets and finds that the Company incorporated those trade secrets into the Company’s products or the Company’s marketing materials, the burden will then shift to the Company to prove that the sales Appian seeks as damages were not the result of the alleged misappropriation and use of the alleged trade secrets.

This legal standard has not previously been adopted by the Virginia courts.

The Company continues to believe that its sales of the products at issue were not caused by, or the result of, the alleged misappropriation of trade secrets, and is submitting evidence to the jury to that effect.

The Company is unable to reasonably estimate possible damages because, among other things, of the uncertainty as to how a jury may decide and the parties’ existing grounds for appeal based on rulings to date in the proceeding.

On May 9, 2022, the jury rendered its verdict finding that the Company had misappropriated one or more of Appian’s trade secrets, that the Company had violated the Virginia Computer Crimes Act, and that the trade secret misappropriation was willful and malicious.

The jury awarded damages in the amount of $ 2,036,860,045 for trade secret misappropriation and $ 1.00 for the violation of the Virginia Computer Crimes Act.

Since the jury rendering its verdict, the Company and Appian have filed post-trial motions with the court.

On May 26, 2022, the Company filed a motion for judicial investigation of juror misconduct.

Appian filed its opposition on June 17, 2022.

A hearing on that motion is scheduled for July 28, 2022.

On June 8, 2022, the Company filed a motion to set aside the verdict, Appian filed a response with the court on July 8, 2022, and the Company filed a reply to Appian’s filing on July 22, 2022.

Also on June 8, 2022, Appian filed a motion for attorneys’ fees and costs and for post-judgment interest, seeking an award of attorneys’ fees in the amount of approximately $ 22.6 million, costs in the amount of approximately $ 4.2 million, and post-judgment interest at the rate of 6 % per annum.

The Company filed its opposition to that motion on July 8, 2022.

Appian filed a reply brief on July 22, 2022.

The Court has not yet set a date for a hearing on the motions filed on June 8, 2022.

As of the date of this Quarterly Report on Form 10-Q, the court has not yet ruled on the post-trial motions or entered a judgment in this matter.

The Company intends to appeal any judgment against it, if such a judgment is entered.

The Company continues to believe that it did not misappropriate any alleged trade secrets and that its sales of the Company’s products at issue were not caused by, or the result of, any alleged misappropriation of trade secrets.

The Company is unable to reasonably estimate possible damages because of, among other things, uncertainty as to the outcome of post-trial motions, any appellate proceedings, and/or any potential new trial resulting from the post-trial motions or the appellate proceedings.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

City of Fort Lauderdale Police and Firefighters’ Retirement System, Individually and on Behalf of All Others Similarly Situated v.

Pegasystems Inc., Alan Trefler, and Kenneth Stillwell

On May 19, 2022, a lawsuit was filed against the Company, the Company’s chief executive officer and the Company’s chief operating and financial officer in the United States District Court for the Eastern District of Virginia Alexandria Division, captioned City of Fort Lauderdale Police and Firefighters’ Retirement System, Individually and on Behalf of All Others Similarly Situated v.

Pegasystems Inc., Alan Trefler, and Kenneth Stillwell (Case 1:22-cv-00578-LMB-IDD).

The complaint generally alleges, among other things, that the defendants violated Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Rule 10b-5 promulgated thereunder and that the individual defendants violated Section 20(a) of the Exchange Act, in each case by allegedly making materially false and/or misleading statements, as well as allegedly failing to disclose material adverse facts about the Company’s business, operations, and prospects, which caused the Company’s securities to trade at artificially inflated prices.

The complaint seeks unspecified damages on behalf of a class of purchasers of the Company’s securities between May 29, 2020 and May 9, 2022.

The Company believes the claims brought against the defendants are without merit, and intends to vigorously defend against these claims.

The Company is unable to reasonably estimate possible damages or a range of possible damages in this matter given the stage of the lawsuit, the Company’s belief that the claims are without merit, and there being no specified quantum of damages sought in the complaint.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements